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ALAN S. MURRAY: Good morning. Let's go ahead and get started.

I'm Alan Murray. I welcome you all to today's Council on Foreign Relations meeting with Austan Goolsbee, who really needs no introduction. Austan is well known as the president's top economic adviser. I think he's also the youngest member of the president's Cabinet. Is that still true? And is reputed to be the funniest member of the president's Cabinet -- although that's a difficult thing to pull off when you're an economist. (Laughter.)

You're all going to have to be a little bit tolerant of him this morning because yesterday he had interviews with both Jim Cramer and Stephen Colbert in the same day. So if he looks a little beat up, worn down, you'll understand why.

A couple of housekeeping announcements: This is part of the C. Peter McColough Series on International Economics. The next meeting in this series will be Wednesday, June 1st, with Olli Rehn, the European Union commissioner for economic and monetary affairs.

Also, please turn off your BlackBerrys, cell phones -- yeah, I see everybody reaching into their pocket -- iPads, anything that has a signal. Turn it off, so it doesn't interfere with the sound system.

And I'd like to remind everybody that this meeting is on the record.

Austan is going to make some comments, then he and I are going to have a conversation, and then we'll open it up to questions from the rest of you.

Austan.

AUSTAN GOOLSBEE: Thanks, Alan.

I wanted to spend most all the time just talking -- I mean, if you saw the list, it's a great group, and I really appreciate everybody taking the time this morning.

So I thought I'd just make three simple observations about the economy, maybe to frame our discussion.

The first is the most important issue facing the country is not deficits, is not the debt limit. It is that we grow in both the short run and the long run; that five years from now, we remain the richest country on Earth, with the most productive workers on Earth. That is our most important pressing challenge.

And we should not forget that when we get to points two and three, about deficits, that the -- there are some things that we know: to be in the place that we need to be five years from now, we've got to make investments today, and to skimp on those would be ultimately self-defeating.

I think, at least with the -- from the very deep hole that we start in, from a recession that began in 2007, we're clearly making progress. So if you look at the last 12 to 15 months, we have commenced, it seems fairly clear, a transition out of the rescue mode and into something like shifting to a growth mode. We have begun adding jobs at a fairly robust clip. So in the last 14 months, the private sector added more than 2 million jobs, which would be a respectable year, even in expansion. It's just that we start from a very low -- from a very low base and a deep hole.

I think part of what has made this a painful transition, in addition to the severity of the recession, is that we know from the data that the expansion of the 2000s was highly different than all previous expansions in the U.S., as well as highly different from what other advanced countries were doing during the 2000s. It was highly imbalanced, driven almost entirely by excess consumer spending and by residential housing construction.

So those two things, each of which was not sustainable -- we brought the personal savings rate down literally to 0, and we had a housing bubble fueling the construction expansion -- those nonsustainable drivers of growth mean that as we expand, we're -- we can't just go back to what we were doing in the 2000s. It involves shifting to a more broad-based, more traditional recovery, fueled by business investment, by export growth, by innovation and some of the things that have been, if not forgotten, at least far less important in the -- in the last 10 years than they were in periods before that.

So in addition to recovering from financial crises the international data tell us is difficult, we've also had this -- we got to shift what's -- what we are recovering to. Well, there are at least the promises that we have begun to do that. If you look at the economic -- the beginnings of this recovery, the job creation, one of the strongest features of it is it's very broad-based.

If you take the five biggest drops in the unemployment rate, what states have had the biggest drops over the last year -- there are eight, because there are some ties in there -- included in the eight are Michigan, Illinois, Indiana, Wisconsin and Ohio -- big industrial Midwest states whose level remains high but has come down quite significantly over 12 months -- I doubt that three or four years ago, if I had told you we're going to have the worst recession since the Depression, what will be some of the states to start the turnaround, people would probably not have said: Well, manufacturing will probably be doing well. It'll probably have its best employment year in almost 15 years, as well as business services, health care, retail, education. It's -- it has been a broad-based recovery, which are the beginnings of the kind of thing that we would want for the longer term, which is shift out of heavily imbalanced nonsustainability into something that's broad-based, across a lot of industries, across a lot of skill levels.

So the -- on the growth side, I think it's fairly optimistic of the trajectory, not of the -- what the conditions are -- they're obviously not good, and we got a long way to go -- but the trajectory, I think, is fairly healthy.

There are some clouds, and I think most of the clouds are associated with some of the international issues: gas prices and the Middle East; we've had the floods, earthquakes, et cetera, nuclear coming from Japan. And the European financial issues remain unresolved, though they are less scary to the markets perhaps this time around than the first time, because there's a little clearer framework of what would happen in a worst-case scenario, that there is some version of a European type of a -- of a TARP; there's just an argument over who has to -- who has to foot the bill.

So on the growth side, transitioning to a phase in which we're out of rescue which is inherently more controversial because -- involves significant government involvement, involves a government in an unsustainable position because it was never designed to be sustained; it was just designed to prevent us going into something worse. Everyone's happy to get out of that. Let's stop arguing about the issues from two-plus years ago of would there have been a depression bigger than 1929 or merely the worst recession we've ever had. Look, let's -- let us shift now to where we want to be, which is government phasing out of its more advanced role and finding ways to incentivize the private sector to stand up and lead the recovery. That's the only sustainable job creation that we're going to have. The only sustainable growth we're going to have is going to come from the private sector.

Things like the tax deal of December, in my view, become the canonical policy response in phase two. That is, the government's still involved, but it's about incentives for the private sector to do the lifting. We are in a moment where the private sector has returned to profitability, they've accumulated money on the balance sheet. And so a policy like investment expensing, using the tax code to try to get people to buy equipment in the United States and build factories here at home, is the perfectly rational response.

Anybody who says that in March of 2009 we should have done nothing, we should have -- we should have instead done kind of phase-two policy and given an investment incentive -- it's almost like they weren't paying attention. There was no prospect that in the depth of the crisis investment incentives would have led to a big business investment-led recovery at a moment when everyone was battening down the hatches and selling off everything they could.

As we have transitioned now to a different moment, the policy response, I think, shifts, and so we should be looking at things like how do we streamline the regulatory apparatus; the regulatory look-back the president has put forward, where we're going to go through all the agencies, we're going to find outmoded regulations, we're going to try to find things that prevent the startup of new businesses; the Startup America initiative, where we're trying to increase access to capital for small businesses; public-private partnerships like the Skills for America's Future.

Things like that -- or even the Patent Office -- many of these things don't cost money. So the Patent Office, we've got -- the number of patent applications has tripled in the last 20 years. We've hired almost no more patent examiners, because Congress has -- and the Patent Office doesn't even cost money. They charge fees for people who apply for patents, so it pays for itself. They've diverted the fees of the Patent Office to other things, so that if the Patent Office tries to hire examiners, they don't have any money. So as a result, there are 1.2 million pending applications, and more than 700,000 of them -- they haven't even opened the applications, because they're so overloaded. So the average patent takes three years to get. And of course, the typical startup -- some significant fraction of them are already dead in three years. So for a small company, waiting three years to get a patent makes no sense.

So we're trying to change the patent system so that they would have the possibility of a streamlined process; that you could pay, you would be guaranteed to hear within a year, yes or no, on your patent, and they stop diverting the patent agency's fees.

We try to eliminate -- the other thing that happens is crummy patents get through because the patent examiner has 40 seconds to look at the application. Somebody got a patent through for a crustless peanut butter and jelly sandwich, where the insight was that if you put peanut butter on both sides and put the jelly in the middle, then it won't soak through into the bread. And as I said, I'm pretty sure my mom did that when I was a kid, but maybe she should have been paying royalties. I don't know what the date of this patent was.

And to look back after the fact, it costs on average something like $4 million of -- and more than a year of legal wrangling as people sue over patents. And if you take your phone, it's got 10,000 patents associated with the device, private equity companies going out and just buying up patents that they use to launch lawsuits because that's -- that has proven to be a lucrative investment, just suing successful device manufacturers.

So I use that only as a microcosm example of there are things that we can do that are about innovation, that are about shifting the focus to entrepreneurship to start-ups and growth, that don't even cost money. So the phase one thinking, which I hope we get out of our head, is how big -- how important is this program? How much does it cost? That's the Washington mentality. In rescue, the thing that matters is what's the aggregate size of the stimulus.

I think we've passed out of that moment. That's not the correct question anymore, which leads me to point two, which is, thinking about our long-run fiscal challenges and the deficit is important. It's a very important issue. It's a problem we've known about for 40-plus years. That is a problem that has not gotten materially worse in the last two years. The thing that got materially worse in the last two years is we had the worst business cycle since 1929; and that sends tax revenues way down to 60-year lows; it sends short-run spending up to highs that we haven't seen in a long time.

Much of that goes away as the business cycle improves. But a big chunk doesn't, the structural deficit, which are the long-run problems facing the country, which we've known about are from the aging of the population and rising health-care costs. And I would add in the second tier some of the tax policy choices made in the 2000s. Those issues are a long-run problem. And as I say, they didn't get worse in the last two years. We should deal with them. We can do that in a reasonable way.

I thought the fiscal commission laid out a framework that it felt like everyone was inching towards something like a fiscal commission framework until relatively recently, which is -- the insight of the fiscal commission is that -- is kind of two insights. One, this isn't a 2012 problem or 2011 problem, it's a medium- and longer-run issue, and that the way to address that is through a balanced plan: there's some on entitlements, there's some on discretionary, there's some on defense, there's some from tax revenues. You save some on interest. Taken collectively as a balanced shared sacrifice, you can make major headway on that problem.

The president outlines a long-range budget plan that's very much in the spirit of the fiscal commission, which is around $4 trillion of deficit reduction over around 10 years In the president's case it's 12 years; the fiscal commission was 10. And it's this balanced plan. So spending and interest -- sort of $2 of spending cuts, $1 of tax revenues, $1 of interest savings -- gets you to a net of 4 trillion (dollars.)

There is an alternative approach, which is embodied in the Ryan plan, which is not a balanced plan. Now, it gets to a net deficit reduction number that's very similar, so there is a promising start that at least we're kind of in the same ballpark of around 4 trillion (dollars) in around 10 years.

But the difference is that that approach is more than 100 percent spending cuts, because you've got pushing $2 trillion of high-income tax cuts that you pay for in addition to getting the net 4 trillion (dollars) of deficit reduction. So you've got -- whereas in the fiscal commission and the Obama plan it's sort of 2 (trillion dollars) of cuts, 1 (trillion dollars) of interest, 1 (trillion dollars) of revenues; on this side it's 5 trillion (dollars) of cuts, 2 trillion (dollars) of tax cuts and the 1 trillion (dollars) of revenue, getting you to the same approximate net figure.

I think that's very problematic, because if you look, can you actually afford high-income tax cuts in a moment like this, I think the evidence is not mixed; it's quite clear that the high-income tax cuts did not dramatically accelerate the growth rate of this country. When we passed them in the early 2000s, that did not create a massive growth period of the U.S. economy. It was a -- it was an expansion that was relatively meager, followed by biggest recession since 1929. It's -- on the other side, when Bill Clinton put in the marginal rates at the higher level, that did not obviously destroy the growth rate of the country through the 1990s.

I think it's not to say that the tax rates are the main driver as it is to say there is little evidence that somebody can point to us -- okay, I'm getting the signal. Fine. Ignore this point. Put a period -- (soft laughter) -- so on deficits, I think the choice, if you're going to try to cut that much out of the spending, you are going to have to yank the financial aid from 9 million college students just before they start the next school year, and you're going to get hundreds of thousands of kids to drop out of school. That's short-sighted. That's not the way you should balance a budget. It's a mistake. That doesn't save money for the country in the long run, because you're undermining the very tenants of how we're going to grow out in the future.

And so my final thought is just on the debt ceiling. In this room, I'm sure everyone is aware. Other countries do not have a debt ceiling. The debt ceiling is not like a credit-card limit. It's not about -- it doesn't restrict your future spending. The debt ceiling is about things we already did. So it is like going -- in December, they agree on a tax-cut deal in a bipartisan way. Then we agree on a budget in a bipartisan way. Now we have the debt ceiling that applies to what Congress has already passed. To not raise the debt ceiling is to say we're just not going to -- we agreed to buy the stuff, we're just not going to pay the bill. And it would not be good for the economy. We've finally turned -- we've finally started adding jobs. We're finally seeing promise in a lot of industries to come out of a deep hole. That strikes me as the last thing the economy needs. And I think you've seen that with the private sector.

I apologize, Alan. I was filibustering so you can't ask me any hard questions. (Laughter, applause.)

(Inaudible) -- okay.

MURRAY: Austan, let me -- let me start where you stopped. You've been raising the alarm about the debt ceiling, but we hit the debt ceiling. The bond market yawned. In fact, if anything, rates have gone down a little bit.

GOOLSBEE: That's very -- look, but that's very misleading. We've been saying all along -- I made the crude analogy to Stephen Colbert last night that, you know, if your water is cut off in your house, you have a big problem. The fact that there's 10 gallons in your toilet that in an emergency you could scoop out and use does not solve your problem. And we said from the beginning that we were going to hit the ceiling, that there were then emergency measures that we could take of increasingly negative attribute and that that was going to run out and that that runs out by the beginning of August and that we really don't want to get right up -- this is not the continuing resolution, the government shutdown, there's a clock, there's a time and, you know, at midnight on this day. The debt limit doesn't work like that.

MURRAY: But that's part of your problem here, isn't it? I mean, even the new data --

GOOLSBEE: I hope not. I mean --

MURRAY: No, what actually happens on August 7th? In other words, if there is no increase in the debt-limit ceiling, what do you do then?

MURRAY: Right.

GOOLSBEE: It doesn't mean you default on bonds.

MURRAY: Well, I --

GOOLSBEE: You either default on the bonds, default on Social Security, default on Medicare, default on the --

MURRAY: So which you would do? (Laughter.)

GOOLSBEE: Since my dad is a -- you know, is this big guy, and they live out in Abilene, Texas. And back in the old days there were these -- now they've got regional jets -- so they used to fly on these propeller planes. We get on one one time, and the flight attendant's got a piece of paper and she says to my dad, how much do you weigh? And my dad's like, whoa, wait a minute.

MURRAY: (Laughs.)

GOOLSBEE: Why does that matter? Like, I don't want to -- I don't want to get on a plane where, like, my weight makes it -- (laughter) -- what -- they were trying to just -- you know, the bags were in the back or whatever.

Although I kind of feel like this, of like, whoa, wait a minute. Which of those do you default on? What kind of question is that? Like the -- (laughter).

MURRAY: Well, it's --

GOOLSBEE: Oh, my God.

MURRAY: It's a question you might have to answer.

GOOLSBEE: No, no. We're not -- no. I don't -- I think the market doesn't think we're going to run into this. If they did, people would be freaking out already. That was kind of the premise of your question.

Please, let's have a reasonable -- it's perfectly appropriate to fight about the budget. It's perfectly appropriate. Let's sit down; let's look at the 4 trillion (dollars) and say, do we want to do that in a balanced way? Do we want to do it in a way that involves tax cuts and much bigger spending cuts? That's perfectly appropriate.

Having an argument about whether we should authorize the decisions we've already voted on and made in a bipartisan way, that is not a healthy --

MURRAY: So Speaker Boehner says, we'll give you a debt limit increase equal in size to the -- to the cuts you agreed to. In other words, if you need 2 trillion (dollars), then let's agree on 2 trillion (dollars). And can you make that work?

GOOLSBEE: I think you could. I mean, the president outlined a program that had 2 trillion (dollars) of cuts.

MURRAY: It's a time frame issue, I guess.

GOOLSBEE: Yeah. Look, so, the -- I think there's a reasonable prospect. But the cynics would probably say, what's the chance of a -- of a grand bargain is no more than, you know 18 percent; and the optimists think that's 18 times bigger than it's ever been before. You know, so we're actually having a discussion about entitlements, defense, discretionary, looking at the broader picture. We're no longer saying, ah, the problems of our fiscal -- our fiscal problems are rooted in foreign aid and, you know, the Post Office or what -- you know, things that are trivial. Planned Parenthood is not driving the deficit.

So I'm at least heartened that we're sitting down; the vice president's in these negotiations. And I think it's -- we shouldn't underestimate -- in the realm of the impossible -- we started from a range where we kind of are in the same target amount and in the same target time frame. So that's -- (inaudible).

MURRAY: Well, but here's where -- here's where the -- here's where the difference is very large. The argument, at the end of the day, isn't really about the deficit. It's about the size of government. And you're laying out a program that could -- that gets the size of government into the high 20 percent, maybe approaching 30 percent. And they are laying out a program that keeps the size of government at around 20 percent of GDP. So they are very different paths for government.

GOOLSBEE: Look, you're making -- you see --

MURRAY: They may not be different paths --

GOOLSBEE: You're turning yourself into the cynic. You're trying to find where --

MURRAY: No, I'm saying --

GOOLSBEE: I understand there's -- (inaudible).

MURRAY: I'm not -- I'm not -- I'm saying that's an important decision to make. What -- how -- what is the appropriate size of government in the United States? What's your answer to that question?

GOOLSBEE: Well, that -- you don't answer that with an aggregate number, but you look at what are the things that we're talking about. So when the president releases a budget, and we put out the terminations and reductions book that's got 30 billion (dollars) of things that we're saying, we think this is either duplicative or we -- you know, it might be nice but we can't afford it, here's 30 billion (dollars) of things we want to get rid of, I could find you 2 billion (dollars) -- that that'd be 30 billion (dollars) we don't think has a negative impact to get rid of -- I could find you 2 billion (dollars) either on the innovation and R&D side or on the education budget where I'd say that would be extremely detrimental if we got rid of that part of the government. So, again, it's not about the aggregate size.

I mean, I can't help but note that the -- of previous presidents, one of the highest government spendings as a share of the economy is under Ronald Reagan; it's 22 1/2 percent spending through the Reagan years. And so I do think a little bit of the argument that what ought to determine going forward -- even though we know that the population is aging dramatically -- ought to be historical spending rates I think is a little -- I think there are some problems with that logic. But, look, it's a -- it's a negotiation. We ought to have that.

My point is, if we've got, as the president said, 40-year debates over fundamental things like what should be the rates of taxation on high-income people, what should be our commitment to the elderly, et cetera, it hardly seems realistic to try to tie a negotiation and debate about that to a thing that, if we can't agree in the next three weeks, then the U.S. has to default on the defense budget or blow up the (finances ?) --

MURRAY: (Inaudible) -- long-term problems and not impose any sacrifice. So Paul Ryan has done something very different.

GOOLSBEE: Paul Ryan did two things. So, one outlines a budget, as I say, that's very different from the fiscal commission, very different from the president, very different from what was to be the Gang of Six, and now five, and maybe none. (Laughter.) But is -- the 10-year budget is not a balanced plan, as I kind of outlined.

The second is, thinking through in the longer-run period what ought to be the approach on Medicare.

MURRAY: Right.

GOOLSBEE: It abolishes Medicare. The fundamental issue of Medicare when it was passed was that the elderly had the lowest insurance rates in the country. And I don't think that's a big surprise. They tend to be risky for an insurance company, and expensive. And to shift Medicare out of "We're going to put everybody in the same pot, so we have the lowest possible expenses and a -- and a very wide pool," I think there are some great dangers in that, not just for the budget, because you're fundamentally raising the cost of health care.

The -- what we must address in the long run is the health care cost inflation rate. The Ryan plan does something, switching it to a voucher and sending it out to private competition, which we know -- not -- when I say "we," we don't -- I don't mean the administration; everyone in the industry knows that will dramatically raise the overall cost of health care. The Congressional Budget Office says in the very first year it will be $6,000-plus higher costs overall, not just the -- what share are paid by the elderly.

MURRAY: Because of administrative costs?

GOOLSBEE: Yeah, because of administrative costs because -- I mean, if we look at Medicare --

MURRAY: But the idea is we create a marketplace where consumers become cost sensitive.

GOOLSBEE: Well, see, I think the evidence suggests, and the evidence before there was Medicare is that in high risk of disease and cost populations, that often means the breakdown of a market. So you're going to put in the market -- healthy elderly people who have never had a pre-existing condition are going to find that to be a wonderful experience. They're going to say, look, I can find a really cheap plan. But, you know, how many 75-year-olds have never had any health scare of any kind?

And I think to go back -- the majority of the elderly were not insured when they passed Medicare. That's why they passed it, even though the overall rates of uninsurance for the country were very similar to what they are today. I think it's quite dangerous to shift to a Balkanized market, because you're going to invite the kinds of cream-skimming that you see in the other parts of the market.

MURRAY: So let me change the subject a little bit. You talked about now is the time in the administration to focus on incentives for business.

GOOLSBEE: Yes.

MURRAY: And then we pick up the paper a couple of weeks ago and discover the NLRB is telling Boeing they can't move to South Carolina.

GOOLSBEE: Well, that's not the -- as you know, that's an independent regulatory agency. We're -- we don't have any --

MURRAY: Did they make a mistake?

GOOLSBEE: The administration is not supposed to weigh in on independent regulatory agencies. It's not my area --

MURRAY: I can't ask you about interest rates either?

GOOLSBEE: You can ask me anything you want, but I'm not -- I mean -- (laughs, laughter) -- but if you do say, "What should the Fed do?" I'm not going to tell you that, either --

MURRAY: But that's not -- but what's the -- I mean, we -- the statistics -- the statistics show that large companies based in the U.S. over the course of the last couple of years have reduced employment here by 2 million and increased employment overseas by at least 2 million. What do you have to do as an administration to reverse that?

GOOLSBEE: Look, I think that's a -- that's a very important -- that's a very important fact. I think we've got to do two things. One is highlight -- I would highlight the importance of new enterprises in the U.S., which has historically played very much to our strength. And everybody knows that new companies are more likely to die quickly, but even if you subtract off the jobs lost from the firm deaths, the net new -- the net job creation of new firms over the last 14 years that we have data is plus 40 million, which is well in excess of 100 percent of the job creation in the country.

So big multinational firms may have been shrinking employment. That has been historically well more than offset by the creation of new firms. So I think one thing is we've got to put the emphasis on new firms.

MURRAY: And don't worry about (employment complaints ?)? Or --

GOOLSBEE: No, no, I'm saying --

MURRAY: Okay.

GOOLSBEE: No. And then two, for existing enterprises, I think the fact that we have a tax system where we've got the highest corporate rate in the world but the actual collections are no higher than average because we have the narrowest base and the greatest variability of tax rates paid within an industry of any country in the world is a problem for us. I don't think it makes sense. I think we -- it would -- the --

MURRAY: It doesn't make --

GOOLSBEE: We ought to broaden the base and lower the rates.

MURRAY: It may not make sense, but what you've called for is a revenue-neutral tax reform. If you --

GOOLSBEE: Yes, broaden the base, lower the rates.

MURRAY: So broaden the base -- I mean, you talked about the importance of an investment tax credit just a minute ago. If you take away depreciation incentives in order to pay for a lower rate, do you help the problem? Does it -- I mean, it may make sense --

GOOLSBEE: Well, what's the problem? I mean --

MURRAY: The problem is employment. You've said it's growth and employment.

GOOLSBEE: Well, the investment incentives is about the short run. The longer run, having a competitive corporate tax rate -- as I say, the actual taxes paid are not very much higher here than other advanced countries and actually below quite a number. I think a simpler system that has a low rate -- I think there are a lot of companies that would be willing to give up even deductions or incentives that they use, that they like, if they could freely move money around --

MURRAY: Will it encourage growth?

GOOLSBEE: I think it would encourage growth. I mean, it would certainly in the -- in the scoring of corporate tax, they tend not to include that a lower rate would attract new investment in the United States. That tends not to go in the score. But I do think there would be a --

MURRAY: And when will the administration put a detailed corporate tax-reform program on the table?

GOOLSBEE: Look, as you know, there's some disagreement in Congress of do the -- would the Republicans want to do something on corporate tax reform alone this year or do they want to see if they win the White House in 2012 and tax reform be put off to 2013? I think we ought to address it. It's one of the issues of international competitiveness that could be done right now, in my view. Most issues of educating the workforce are multi-year. Innovation and R&D are for things that are going to be in a few years, but this strikes me as one we could do.

MURRAY: And just one other thing before I open it up. The Federal Reserve has now talked --

GOOLSBEE: (Chuckles) -- I told him, he was going to ask me about the Federal Reserve. I mean, you know I'm not going to answer --

(Cross talk.)

MURRAY: Well, no, this is fundamental to economic growth, to what you're talking about.

GOOLSBEE: Okay.

MURRAY: The Federal Reserve has talked about the need to begin its exit strategy sometime soon. The assumption is that that's going to result in higher interest rates. We still have unemployment over 9 percent. Can you get the kind of juice to growth that you're talking about in an -- in an environment where the Fed is unwinding all its stimulus of the last couple of years?

GOOLSBEE: I appreciate you didn't ask me what the monetary policy should be. I will say two things about that.

The first is, it strikes me the Fed is kind of engaged in the same effort the federal government is and that many of the governments around the world are, which is trying to get out of this advanced position that was done in rescue mode but not to get out so quickly that it stifles the private sector standing up.

If the private sector had not shown clear signs of strength, did not -- had not accumulated money on the balance sheet, if you were not seeing investment growing at double-digit rates and significant job creation, I would say we'd be more nervous than we are now. I think that what we want to be doing is phasing down this advance government involvement. That's the goal. And the Fed is doing its version of that.

On the technical point of, when the QE2 ends, is the interest rate going to go way up, I personally am a little puzzled by that, because this is the biggest non-secret that we've ever seen. They've almost literally said here's the date we're going to stop, here's exactly how much we're going to do. So if that were going to drive up interest rates, I would have thought that would have already started happening. And you kind of haven't seen that. But I could be wrong; I just don't understand that -- the mechanism.

MURRAY: And what will the unemployment rate be come November 2012? (Laughter.)

GOOLSBEE: Okay. We have an official forecast.

MURRAY: Yeah.

GOOLSBEE: The official forecast says ins the fourth quarter of 2012, the unemployment rate will be 8.2 percent.

MURRAY: And based on your -- as a student of history as well as economics, what does that tell you about the chances of the incumbent president?

GOOLSBEE: Well, that is neither a historical nor an economic fact. (Laughter.) We haven't -- I don't know that we've had --

MURRAY: Well, it wasn't a factual question.

GOOLSBEE: You know, we are ahead -- that forecast had to be locked in last November, comes out in the budget. And we had predicted for 2011 that there would be payroll job growth of about 145,000 a month for 2011 and that the unemployment rate would average 9.3 for 2011. Thus far in 2011, we're well head of both of those. The unemployment rate is lower and we've generated substantially more jobs than that. So it might -- you know, we might see improvement when we update it.

I think the evidence on what the political implications are are conflicting, because high unemployment rates equal bad, falling unemployment rates equal good, and somewhere between those two is a -- is November 2012. But I'm not an expert.

QUESTIONER: I'm Joe Bartlett. I'm a lawyer. I'm chairman of the Advisory Council to the Angel Capital Association. Sounds like a speech; it's not, and I'm not an expert. But are you aware that there is a principled position that patent reform will strangle entrepreneurship in its crib in this country? And if not, I'd be happy to mail it to you.

GOOLSBEE: Okay. I'm familiar with this argument, but just be careful about the phrase "patent reform." These patent reforms that we are talking about are different than the -- there's a whole existing battle between, sort of, big companies versus small companies about how -- how strong and how -- both how deep and how broad should patent protection be. And the fear there is, if you allow very broad, very powerful patents, that only big companies can afford to get and defend, that start-ups will essentially be driven out before they can ever begin. We're not weighing in to that -- to that battle.

What we're talking about is, let's find something that can speed up the patent application process, and actually it's been widely praised by the -- by most of the entrepreneurial community on the grounds that -- we got -- in a survey, I think it was done by the NVCA, 75 percent of the venture-backed start-ups said having a patent was critical for their being able to get financing.

So I think these patent reforms are not in that. But I am aware of those.

MURRAY: Steve. Right here.

QUESTIONER: Hi. Steve Ratner -- (inaudible). As everybody knows, last year the president appointed the Bowles-Simpson commission to do its budget work. It reported. It didn't get to the threshold to get a vote in front of Congress, but it did get significant bipartisan support, including from three Republican senators, I believe including from Tom Coburn.

The president's budget in January -- the president had said some nice things about it in his State of the Union; in the budget in January, not a lot about it. And then the president came out with his budget proposal, as you said, which you sort of said was four years -- 4 trillion (dollars) over 10 years, over 12 years. I think if you do the numbers right -- you can correct me -- it's about 2 1/2 trillion (dollars) over 10 years, 4 trillion (dollars) over 12 years. And Simpson-Bowles was 4 trillion (dollars) over 10 years.

My point is, Simpson-Bowles had pretty bipartisan support. I thought it was pretty thoughtful. I didn't agree with everything. I'm sure you didn't agree with everything. Since it was the president's commission, why couldn't the president just stand up and say, it isn't perfect, it isn't exactly what I would do, but it's an important step in the right direction; we should all just get behind this and do it?

GOOLSBEE: Well, I think you're being a little unfair to the president at the State of the Union. The president -- as you recall, in the run-up to that, the president's critics were clearly insinuating over and over that our long-run fiscal problems were rooted in discretionary spending and the stimulus and saying that the president's commitment to spending -- that wasteful government spending was what the long-run problem was.

And the president presented a budget, and in the State of the Union said, I'm going to give you a budget. You keep suggesting that it's about discretionary spending. I'm going to give you a budget that is going to bring discretionary spending as a share of the economy down to the level it was under President Eisenhower. And you are going to -- we are all going to have to agree that's only 12 percent of the budget and that doesn't do it. And what we would have to do is think about the broader issues of entitlements. And if you want to do that, we have to do that in a bipartisan way, and we've got to all hold hands and do that together as the fiscal commission said.

Now, I think any reasonable analyst would suggest that the first toe the president put in the water on entitlement reforms during the health care plan was not met by the greatest degree of seriousness of, ah, what an interesting idea of ways to save money in Medicare. I mean, it -- there is perhaps no other issue that was more influential in getting a bunch of new folks elected to Congress than the demonization of the -- of that issue.

So I think the president was perfect -- if the president had gotten up at the State of the Union and said, here -- I'm going to take the fiscal commission and here's my plan to cut Social Security and cut Medicare and do whatever, I really strongly do not believe that he would have been met by: That is an interesting first proposal. I think he would have been met by: First, he tried to pull the plug on your grandma and now he's trying to take her Social Security away. So --

MURRAY: Although the president wasn't --

GOOLSBEE: So --

MURRAY: -- terribly gracious in greeting the Ryan plan.

GOOLSBEE: No. But now, hold on. So that -- so that is on the release of the budget.

Then when the Ryan plan comes out, it's clear they've shifted and -- the part that I thought was healthy about the Ryan plan was stopping the claim that it was about discretionary spending and somehow out-of-control government from the stimulus was what our long-run fiscal plan was. And so the president releases his own plan that is balanced like the fiscal commission plan.

The part that's discouraging about the Ryan plan, as I say, is that it's not balanced at all. It's not even the difference between 100 percent spending cuts versus 66 to 75 percent spending cuts, depending on how you count the interest; it's that it's well more than 100 percent. And that is why the president is not positive on the reaction to the Ryan plan. As he says -- I think quite persuasively and quite correctly -- there are two totally different models of how do we cut enough from the deficit to stabilize the debt-to-GDP ratio and start it shrinking, which is something like 4 trillion (dollars) over 12 years -- that's sort of where our numbers come from -- and that the healthier way to do it is in a balanced way like the fiscal commission, not in an unbalanced way like the Ryan plan. So I think the president's plan is not exactly the same as the fiscal commission, but it's clearly motivated by that, and it's even taking the same ratios as Bowles-Simpson.

The problem of just putting forward Bowles-Simpson and trying to pass it is that the Republicans in the House -- there were Republicans in the Senate who were quite thoughtful, and they said: Look, we can have some revenues. Let's not raise rates. Let's just try to do it off deductions.

The Republicans and the Democrats from the House didn't go along with the deal, and we got to get both houses of Congress to approve the thing. So just the purely symbolic gesture of saying, well, here's a plan, but it can't pass, is not -- is not going to work. I mean, that's why we're in these negotiations.

They're at least somewhat promising. I mean, I think both sides are taking it pretty seriously, so we got to just hope it comes to (pass ?).

MURRAY: There's a question right here and then a question back there. And I'll get to you.

QUESTIONER: Nick Bratt with Lazard Asset Management. In your comments you talked about policy priorities, but you did not talk about the U.S. dollar. I wonder how important --

GOOLSBEE: (Chuckling.) That's the (third ?) forbidden subject --

QUESTIONER: -- I wonder how important the dollar is in your deliberations, or whether the policy of benign neglect continues to rule.

GOOLSBEE: Well, as -- (chuckles) -- as we all say, the U.S. Treasury speaks for the U.S. government on dollar policy. So I have no statement on what the dollar's --

MURRAY: But you pointed out that we've seen a pretty -- pretty extraordinary growth in manufacturing --

GOOLSBEE: Yeah.

MURRAY: -- that the recovery has been stronger in Michigan, Ohio --

GOOLSBEE: Yup.

MURRAY: -- Wisconsin. Surely that has something to do with the fact that the dollar is weaker.

GOOLSBEE: Well, look, I -- that's probably -- there is a tie. We have been critical that -- the president has repeatedly said he thinks the Chinese have not done enough on their currency to make it a more market-determined price. And I do think that that has had -- that has had the contribution to what have been major international imbalances. And the economies have a way to kind of getting back to equilibrium on -- either prices adjust, quantities adjust, a bunch of things adjust --

MURRAY: So has the weaker dollar been a contribution to economic growth?

(Scattered laughter.)

GOOLSBEE: That is complicated on so many levels, as you know. I think the dollar has had a contribution to the re-rise of manufacturing. I think the Chinese have moved some on the Chinese currency, but we have -- both Secretary Geithner and the president have said they thought they -- we believe they need to do more to make it a more market-determined price. And I think, you know, if you -- if some parts of the world are growing and other parts of the world are struggling to get out of deep recessions and, you know, just transitioning, prices adjust. I mean, that's not a -- that's not a policy statement. The Treasury speaks for the U.S. government on dollar policy, you know --

QUESTIONER: I'm David Robinson (sp). I'm old enough to remember when Britain could not meet its international obligations and Truman took over in 1947. I seldom hear serious discussion of major changes in defense policy as one of the things that might help our economic situation. I mean a fundamental look at our defense policy in this area or even any --

GOOLSBEE: Look, I think it's -- I think it's a valid point. In my view -- I'm not an expert on defense policy. In my view, the main driver of defense policy ought to be how do you best protect the nation.

The budgetary framework of that we obviously need to think about. In the fiscal commission and in the president's budget, the balanced plan approach says: Look, you got to look at entitlements, discretionary, defense, interest, revenues, all of those. I think you got to -- you want to do it in a way that does not compromise the security of the country.

But from what I -- when I talk to the defense experts, there is an argument that, strictly on security grounds, we ought to be thinking about transformation of the American military to meet some of the more 21st-century challenges, let's call it, rather than the Cold War challenges, and that that might have different budget implications for what the force structure is. And I will also say that to the extent that we are phasing out of massive, unpaid-for wars that began in the 2000s, a second benefit is that we don't have to spend that money.

MURRAY: Right here.

QUESTIONER: My name is Suyash Paliwal. I'm a lawyer at Allen & Overy here in New York. And I work on issues arising out of the Dodd-Frank Act and the implementing regulations. As the effective date approaches in July, I'm curious what your thoughts are on the impact of the Dodd-Frank Act on economic growth, short and medium term when that much is put on banks and capital providers.

GOOLSBEE: Well, I have a few thoughts on that. The first is deregulate -- if in your mind is the model -- the only good regulation is a dead regulation and anything that puts regulatory structure on the financial industry is bad, I kind of think the last three years did not serve your worldview very well because ripping up the rules of the road wasn't even good for the financial institutions, okay? If people can't trust the balance sheets, if they don't know where losses are, there's no transparency, there are people who are coming in and doing things, taking big payments for themselves and then retiring the undefeated heavyweight champion and then two years later the thing blows up with no consequence, that's not good for the private -- that's not good for markets. That deeply undermines capital markets. With no public trust, capital markets cannot function.

So step one is, Dodd-Frank put down a very serious marker that we've got to reestablish public trust in capital markets. To not do so is deeply undermining of the entire market system.

I think overall Dodd-Frank has some very important positive contributions. And yes, I know there's quibbling within the regulatory agencies over this rule or that rule or what should some number be. But overall, the prospects of getting hundreds of trillions of dollars out of dark pools of derivatives, where the counterparty issues and a lack of transparency nearly blew up the entire financial system, is good. I can see how some people aren't going to want to pay more margin or whatever, but the -- I mean, we just went through -- that almost destroyed the world, and I think it's good that we're doing that.

Consumer protection -- how can you not look at what happened in the mortgage market and the sophistication of the products that went to less and less financially sophisticated people and the way that exploded and not think that there would be some positive component to a consumer protection bureau? I mean, yes, we've got to work on the details of how we do it, but it strikes me that most -- on the most of the big pieces of Dodd-Frank, it's quite important. And yes, we should think about the competitiveness of our financial markets. We want to do this in the international context. But I really don't understand the argument that in some sense we shouldn't have -- you know, the argument that some have made in Congress, we should go repeal Dodd-Frank and go back to the -- literally to the conditions that existed before the financial crisis. I think that's way disconnected from reality.

MURRAY: So -- can I do two --

GOOLSBEE: One more.

MURRAY: -- last question, because I promised this gentleman up front and I promised this fellow in the back -- two quick questions. And if I can't --

GOOLSBEE: Ah, seems like you're making some promises you can't fulfill, huh? (Laughter.)

MURRAY: Well, we'll see. We'll see. Go ahead. Yes.

QUESTIONER: Yes. (Name inaudible) -- U.S. editor with -- (inaudible). Mr. Strauss-Kahn has resigned. Where does the White House lean for a new nomination? Asian or European?

MURRAY: This is the European section of the --

GOOLSBEE: (Chuckles.) I'm definitely not getting -- weighing in to that. Look, that's not -- I'm chairman of the CEA. I --

MURRAY: But is it a -- is it -- is it a good idea to have -- you know, to have this rule that the head of the IMF comes from Europe and the head of the World Bank comes from the U.S.?

GOOLSBEE: Look, you are so far out of my lane. (Laughter.)

QUESTIONER: Okay. I will -- I will --

GOOLSBEE: I think at this point -- (inaudible) -- director named. It's a very serious time, obviously, both in Europe and in many economies. So I think we want to get a director quickly. But that's not my -- this is clearly not my call.

QUESTIONER: Can I just add then a more appropriate question maybe -- on the Greek debt, what is your position? People have been saying, in Europe, now the time has come to restructure it. What do you think on that?

MURRAY: And you have to answer that in 15 seconds. (Laughs.)

GOOLSBEE: To be determined. You know, I --

MURRAY: (Laughs.)

QUESTIONER: Hi. Steven Diamond (sp) -- (off mic). I have a question I think that you should be able to answer. It goes to your initial point about the biggest issue: growth.

GOOLSBEE: Yeah.

QUESTIONER: You talked about the administration wants to invest in future growth. And you've mentioned innovation, research and development, education. And these all sound great.

But what does the administration believe are the country's competitive advantages relative to other countries? And specifically, how would --

MURRAY: One question.

QUESTIONER: -- it encourage growth of those areas?

GOOLSBEE: Well, you know, I, like most economists, am not a huge fan of industrial policy of the form of, you know, I -- we ought to pick the following six industries to be the industries of the future and decide this should be the technology. But I would say if you look over the recent past, we've clearly got comparative advantage in tech -- we have the strongest research university system in the world by far; research-based, science-based activities which lead over into manufacturing, into biotech, into a bunch of things; that's been a very strong thing in our favor. The health system has been strong in our favor.

Until three years ago, financial services was a -- was a major growth area in the U.S, I think to -- partly related to it being advanced, but even beyond that, as these imbalances are closing manufacturing and an increased orientation to exports. And small-business entrepreneurs and the culture of the U.S. has always been perhaps our strongest comparative advantage -- hard to quantify in numbers but really, really important.

I think, in contributing to these, over the long run, investing in the education system, not skimping on our science budget and encouraging research and development and encouraging the kind of investments in physical capital, as well as in infrastructure, that facilitate building of factories at homes -- at home, are -- I mean, the Solow growth model is basically physical capital, human capital and productivity/innovation. Those are the drivers of growth. They always have been in all economies. The U.S. is the outlier in highest productivity and (riches/richest ?), so we want to be highest in those three. So I kind of think, to me, the industrial policy to ensure industries of the future involve doing the science, educating the workforce and pressing ahead. I'm sure clean energy would be in that too.

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THIS IS A RUSH TRANSCRIPT.

ALAN S. MURRAY: Good morning. Let's go ahead and get started.

I'm Alan Murray. I welcome you all to today's Council on Foreign Relations meeting with Austan Goolsbee, who really needs no introduction. Austan is well known as the president's top economic adviser. I think he's also the youngest member of the president's Cabinet. Is that still true? And is reputed to be the funniest member of the president's Cabinet -- although that's a difficult thing to pull off when you're an economist. (Laughter.)

You're all going to have to be a little bit tolerant of him this morning because yesterday he had interviews with both Jim Cramer and Stephen Colbert in the same day. So if he looks a little beat up, worn down, you'll understand why.

A couple of housekeeping announcements: This is part of the C. Peter McColough Series on International Economics. The next meeting in this series will be Wednesday, June 1st, with Olli Rehn, the European Union commissioner for economic and monetary affairs.

Also, please turn off your BlackBerrys, cell phones -- yeah, I see everybody reaching into their pocket -- iPads, anything that has a signal. Turn it off, so it doesn't interfere with the sound system.

And I'd like to remind everybody that this meeting is on the record.

Austan is going to make some comments, then he and I are going to have a conversation, and then we'll open it up to questions from the rest of you.

Austan.

AUSTAN GOOLSBEE: Thanks, Alan.

I wanted to spend most all the time just talking -- I mean, if you saw the list, it's a great group, and I really appreciate everybody taking the time this morning.

So I thought I'd just make three simple observations about the economy, maybe to frame our discussion.

The first is the most important issue facing the country is not deficits, is not the debt limit. It is that we grow in both the short run and the long run; that five years from now, we remain the richest country on Earth, with the most productive workers on Earth. That is our most important pressing challenge.

And we should not forget that when we get to points two and three, about deficits, that the -- there are some things that we know: to be in the place that we need to be five years from now, we've got to make investments today, and to skimp on those would be ultimately self-defeating.

I think, at least with the -- from the very deep hole that we start in, from a recession that began in 2007, we're clearly making progress. So if you look at the last 12 to 15 months, we have commenced, it seems fairly clear, a transition out of the rescue mode and into something like shifting to a growth mode. We have begun adding jobs at a fairly robust clip. So in the last 14 months, the private sector added more than 2 million jobs, which would be a respectable year, even in expansion. It's just that we start from a very low -- from a very low base and a deep hole.

I think part of what has made this a painful transition, in addition to the severity of the recession, is that we know from the data that the expansion of the 2000s was highly different than all previous expansions in the U.S., as well as highly different from what other advanced countries were doing during the 2000s. It was highly imbalanced, driven almost entirely by excess consumer spending and by residential housing construction.

So those two things, each of which was not sustainable -- we brought the personal savings rate down literally to 0, and we had a housing bubble fueling the construction expansion -- those nonsustainable drivers of growth mean that as we expand, we're -- we can't just go back to what we were doing in the 2000s. It involves shifting to a more broad-based, more traditional recovery, fueled by business investment, by export growth, by innovation and some of the things that have been, if not forgotten, at least far less important in the -- in the last 10 years than they were in periods before that.

So in addition to recovering from financial crises the international data tell us is difficult, we've also had this -- we got to shift what's -- what we are recovering to. Well, there are at least the promises that we have begun to do that. If you look at the economic -- the beginnings of this recovery, the job creation, one of the strongest features of it is it's very broad-based.

If you take the five biggest drops in the unemployment rate, what states have had the biggest drops over the last year -- there are eight, because there are some ties in there -- included in the eight are Michigan, Illinois, Indiana, Wisconsin and Ohio -- big industrial Midwest states whose level remains high but has come down quite significantly over 12 months -- I doubt that three or four years ago, if I had told you we're going to have the worst recession since the Depression, what will be some of the states to start the turnaround, people would probably not have said: Well, manufacturing will probably be doing well. It'll probably have its best employment year in almost 15 years, as well as business services, health care, retail, education. It's -- it has been a broad-based recovery, which are the beginnings of the kind of thing that we would want for the longer term, which is shift out of heavily imbalanced nonsustainability into something that's broad-based, across a lot of industries, across a lot of skill levels.

So the -- on the growth side, I think it's fairly optimistic of the trajectory, not of the -- what the conditions are -- they're obviously not good, and we got a long way to go -- but the trajectory, I think, is fairly healthy.

There are some clouds, and I think most of the clouds are associated with some of the international issues: gas prices and the Middle East; we've had the floods, earthquakes, et cetera, nuclear coming from Japan. And the European financial issues remain unresolved, though they are less scary to the markets perhaps this time around than the first time, because there's a little clearer framework of what would happen in a worst-case scenario, that there is some version of a European type of a -- of a TARP; there's just an argument over who has to -- who has to foot the bill.

So on the growth side, transitioning to a phase in which we're out of rescue which is inherently more controversial because -- involves significant government involvement, involves a government in an unsustainable position because it was never designed to be sustained; it was just designed to prevent us going into something worse. Everyone's happy to get out of that. Let's stop arguing about the issues from two-plus years ago of would there have been a depression bigger than 1929 or merely the worst recession we've ever had. Look, let's -- let us shift now to where we want to be, which is government phasing out of its more advanced role and finding ways to incentivize the private sector to stand up and lead the recovery. That's the only sustainable job creation that we're going to have. The only sustainable growth we're going to have is going to come from the private sector.

Things like the tax deal of December, in my view, become the canonical policy response in phase two. That is, the government's still involved, but it's about incentives for the private sector to do the lifting. We are in a moment where the private sector has returned to profitability, they've accumulated money on the balance sheet. And so a policy like investment expensing, using the tax code to try to get people to buy equipment in the United States and build factories here at home, is the perfectly rational response.

Anybody who says that in March of 2009 we should have done nothing, we should have -- we should have instead done kind of phase-two policy and given an investment incentive -- it's almost like they weren't paying attention. There was no prospect that in the depth of the crisis investment incentives would have led to a big business investment-led recovery at a moment when everyone was battening down the hatches and selling off everything they could.

As we have transitioned now to a different moment, the policy response, I think, shifts, and so we should be looking at things like how do we streamline the regulatory apparatus; the regulatory look-back the president has put forward, where we're going to go through all the agencies, we're going to find outmoded regulations, we're going to try to find things that prevent the startup of new businesses; the Startup America initiative, where we're trying to increase access to capital for small businesses; public-private partnerships like the Skills for America's Future.

Things like that -- or even the Patent Office -- many of these things don't cost money. So the Patent Office, we've got -- the number of patent applications has tripled in the last 20 years. We've hired almost no more patent examiners, because Congress has -- and the Patent Office doesn't even cost money. They charge fees for people who apply for patents, so it pays for itself. They've diverted the fees of the Patent Office to other things, so that if the Patent Office tries to hire examiners, they don't have any money. So as a result, there are 1.2 million pending applications, and more than 700,000 of them -- they haven't even opened the applications, because they're so overloaded. So the average patent takes three years to get. And of course, the typical startup -- some significant fraction of them are already dead in three years. So for a small company, waiting three years to get a patent makes no sense.

So we're trying to change the patent system so that they would have the possibility of a streamlined process; that you could pay, you would be guaranteed to hear within a year, yes or no, on your patent, and they stop diverting the patent agency's fees.

We try to eliminate -- the other thing that happens is crummy patents get through because the patent examiner has 40 seconds to look at the application. Somebody got a patent through for a crustless peanut butter and jelly sandwich, where the insight was that if you put peanut butter on both sides and put the jelly in the middle, then it won't soak through into the bread. And as I said, I'm pretty sure my mom did that when I was a kid, but maybe she should have been paying royalties. I don't know what the date of this patent was.

And to look back after the fact, it costs on average something like $4 million of -- and more than a year of legal wrangling as people sue over patents. And if you take your phone, it's got 10,000 patents associated with the device, private equity companies going out and just buying up patents that they use to launch lawsuits because that's -- that has proven to be a lucrative investment, just suing successful device manufacturers.

So I use that only as a microcosm example of there are things that we can do that are about innovation, that are about shifting the focus to entrepreneurship to start-ups and growth, that don't even cost money. So the phase one thinking, which I hope we get out of our head, is how big -- how important is this program? How much does it cost? That's the Washington mentality. In rescue, the thing that matters is what's the aggregate size of the stimulus.

I think we've passed out of that moment. That's not the correct question anymore, which leads me to point two, which is, thinking about our long-run fiscal challenges and the deficit is important. It's a very important issue. It's a problem we've known about for 40-plus years. That is a problem that has not gotten materially worse in the last two years. The thing that got materially worse in the last two years is we had the worst business cycle since 1929; and that sends tax revenues way down to 60-year lows; it sends short-run spending up to highs that we haven't seen in a long time.

Much of that goes away as the business cycle improves. But a big chunk doesn't, the structural deficit, which are the long-run problems facing the country, which we've known about are from the aging of the population and rising health-care costs. And I would add in the second tier some of the tax policy choices made in the 2000s. Those issues are a long-run problem. And as I say, they didn't get worse in the last two years. We should deal with them. We can do that in a reasonable way.

I thought the fiscal commission laid out a framework that it felt like everyone was inching towards something like a fiscal commission framework until relatively recently, which is -- the insight of the fiscal commission is that -- is kind of two insights. One, this isn't a 2012 problem or 2011 problem, it's a medium- and longer-run issue, and that the way to address that is through a balanced plan: there's some on entitlements, there's some on discretionary, there's some on defense, there's some from tax revenues. You save some on interest. Taken collectively as a balanced shared sacrifice, you can make major headway on that problem.

The president outlines a long-range budget plan that's very much in the spirit of the fiscal commission, which is around $4 trillion of deficit reduction over around 10 years In the president's case it's 12 years; the fiscal commission was 10. And it's this balanced plan. So spending and interest -- sort of $2 of spending cuts, $1 of tax revenues, $1 of interest savings -- gets you to a net of 4 trillion (dollars.)

There is an alternative approach, which is embodied in the Ryan plan, which is not a balanced plan. Now, it gets to a net deficit reduction number that's very similar, so there is a promising start that at least we're kind of in the same ballpark of around 4 trillion (dollars) in around 10 years.

But the difference is that that approach is more than 100 percent spending cuts, because you've got pushing $2 trillion of high-income tax cuts that you pay for in addition to getting the net 4 trillion (dollars) of deficit reduction. So you've got -- whereas in the fiscal commission and the Obama plan it's sort of 2 (trillion dollars) of cuts, 1 (trillion dollars) of interest, 1 (trillion dollars) of revenues; on this side it's 5 trillion (dollars) of cuts, 2 trillion (dollars) of tax cuts and the 1 trillion (dollars) of revenue, getting you to the same approximate net figure.

I think that's very problematic, because if you look, can you actually afford high-income tax cuts in a moment like this, I think the evidence is not mixed; it's quite clear that the high-income tax cuts did not dramatically accelerate the growth rate of this country. When we passed them in the early 2000s, that did not create a massive growth period of the U.S. economy. It was a -- it was an expansion that was relatively meager, followed by biggest recession since 1929. It's -- on the other side, when Bill Clinton put in the marginal rates at the higher level, that did not obviously destroy the growth rate of the country through the 1990s.

I think it's not to say that the tax rates are the main driver as it is to say there is little evidence that somebody can point to us -- okay, I'm getting the signal. Fine. Ignore this point. Put a period -- (soft laughter) -- so on deficits, I think the choice, if you're going to try to cut that much out of the spending, you are going to have to yank the financial aid from 9 million college students just before they start the next school year, and you're going to get hundreds of thousands of kids to drop out of school. That's short-sighted. That's not the way you should balance a budget. It's a mistake. That doesn't save money for the country in the long run, because you're undermining the very tenants of how we're going to grow out in the future.

And so my final thought is just on the debt ceiling. In this room, I'm sure everyone is aware. Other countries do not have a debt ceiling. The debt ceiling is not like a credit-card limit. It's not about -- it doesn't restrict your future spending. The debt ceiling is about things we already did. So it is like going -- in December, they agree on a tax-cut deal in a bipartisan way. Then we agree on a budget in a bipartisan way. Now we have the debt ceiling that applies to what Congress has already passed. To not raise the debt ceiling is to say we're just not going to -- we agreed to buy the stuff, we're just not going to pay the bill. And it would not be good for the economy. We've finally turned -- we've finally started adding jobs. We're finally seeing promise in a lot of industries to come out of a deep hole. That strikes me as the last thing the economy needs. And I think you've seen that with the private sector.

I apologize, Alan. I was filibustering so you can't ask me any hard questions. (Laughter, applause.)

(Inaudible) -- okay.

MURRAY: Austan, let me -- let me start where you stopped. You've been raising the alarm about the debt ceiling, but we hit the debt ceiling. The bond market yawned. In fact, if anything, rates have gone down a little bit.

GOOLSBEE: That's very -- look, but that's very misleading. We've been saying all along -- I made the crude analogy to Stephen Colbert last night that, you know, if your water is cut off in your house, you have a big problem. The fact that there's 10 gallons in your toilet that in an emergency you could scoop out and use does not solve your problem. And we said from the beginning that we were going to hit the ceiling, that there were then emergency measures that we could take of increasingly negative attribute and that that was going to run out and that that runs out by the beginning of August and that we really don't want to get right up -- this is not the continuing resolution, the government shutdown, there's a clock, there's a time and, you know, at midnight on this day. The debt limit doesn't work like that.

MURRAY: But that's part of your problem here, isn't it? I mean, even the new data --

GOOLSBEE: I hope not. I mean --

MURRAY: No, what actually happens on August 7th? In other words, if there is no increase in the debt-limit ceiling, what do you do then?

MURRAY: Right.

GOOLSBEE: It doesn't mean you default on bonds.

MURRAY: Well, I --

GOOLSBEE: You either default on the bonds, default on Social Security, default on Medicare, default on the --

MURRAY: So which you would do? (Laughter.)

GOOLSBEE: Since my dad is a -- you know, is this big guy, and they live out in Abilene, Texas. And back in the old days there were these -- now they've got regional jets -- so they used to fly on these propeller planes. We get on one one time, and the flight attendant's got a piece of paper and she says to my dad, how much do you weigh? And my dad's like, whoa, wait a minute.

MURRAY: (Laughs.)

GOOLSBEE: Why does that matter? Like, I don't want to -- I don't want to get on a plane where, like, my weight makes it -- (laughter) -- what -- they were trying to just -- you know, the bags were in the back or whatever.

Although I kind of feel like this, of like, whoa, wait a minute. Which of those do you default on? What kind of question is that? Like the -- (laughter).

MURRAY: Well, it's --

GOOLSBEE: Oh, my God.

MURRAY: It's a question you might have to answer.

GOOLSBEE: No, no. We're not -- no. I don't -- I think the market doesn't think we're going to run into this. If they did, people would be freaking out already. That was kind of the premise of your question.

Please, let's have a reasonable -- it's perfectly appropriate to fight about the budget. It's perfectly appropriate. Let's sit down; let's look at the 4 trillion (dollars) and say, do we want to do that in a balanced way? Do we want to do it in a way that involves tax cuts and much bigger spending cuts? That's perfectly appropriate.

Having an argument about whether we should authorize the decisions we've already voted on and made in a bipartisan way, that is not a healthy --

MURRAY: So Speaker Boehner says, we'll give you a debt limit increase equal in size to the -- to the cuts you agreed to. In other words, if you need 2 trillion (dollars), then let's agree on 2 trillion (dollars). And can you make that work?

GOOLSBEE: I think you could. I mean, the president outlined a program that had 2 trillion (dollars) of cuts.

MURRAY: It's a time frame issue, I guess.

GOOLSBEE: Yeah. Look, so, the -- I think there's a reasonable prospect. But the cynics would probably say, what's the chance of a -- of a grand bargain is no more than, you know 18 percent; and the optimists think that's 18 times bigger than it's ever been before. You know, so we're actually having a discussion about entitlements, defense, discretionary, looking at the broader picture. We're no longer saying, ah, the problems of our fiscal -- our fiscal problems are rooted in foreign aid and, you know, the Post Office or what -- you know, things that are trivial. Planned Parenthood is not driving the deficit.

So I'm at least heartened that we're sitting down; the vice president's in these negotiations. And I think it's -- we shouldn't underestimate -- in the realm of the impossible -- we started from a range where we kind of are in the same target amount and in the same target time frame. So that's -- (inaudible).

MURRAY: Well, but here's where -- here's where the -- here's where the difference is very large. The argument, at the end of the day, isn't really about the deficit. It's about the size of government. And you're laying out a program that could -- that gets the size of government into the high 20 percent, maybe approaching 30 percent. And they are laying out a program that keeps the size of government at around 20 percent of GDP. So they are very different paths for government.

GOOLSBEE: Look, you're making -- you see --

MURRAY: They may not be different paths --

GOOLSBEE: You're turning yourself into the cynic. You're trying to find where --

MURRAY: No, I'm saying --

GOOLSBEE: I understand there's -- (inaudible).

MURRAY: I'm not -- I'm not -- I'm saying that's an important decision to make. What -- how -- what is the appropriate size of government in the United States? What's your answer to that question?

GOOLSBEE: Well, that -- you don't answer that with an aggregate number, but you look at what are the things that we're talking about. So when the president releases a budget, and we put out the terminations and reductions book that's got 30 billion (dollars) of things that we're saying, we think this is either duplicative or we -- you know, it might be nice but we can't afford it, here's 30 billion (dollars) of things we want to get rid of, I could find you 2 billion (dollars) -- that that'd be 30 billion (dollars) we don't think has a negative impact to get rid of -- I could find you 2 billion (dollars) either on the innovation and R&D side or on the education budget where I'd say that would be extremely detrimental if we got rid of that part of the government. So, again, it's not about the aggregate size.

I mean, I can't help but note that the -- of previous presidents, one of the highest government spendings as a share of the economy is under Ronald Reagan; it's 22 1/2 percent spending through the Reagan years. And so I do think a little bit of the argument that what ought to determine going forward -- even though we know that the population is aging dramatically -- ought to be historical spending rates I think is a little -- I think there are some problems with that logic. But, look, it's a -- it's a negotiation. We ought to have that.

My point is, if we've got, as the president said, 40-year debates over fundamental things like what should be the rates of taxation on high-income people, what should be our commitment to the elderly, et cetera, it hardly seems realistic to try to tie a negotiation and debate about that to a thing that, if we can't agree in the next three weeks, then the U.S. has to default on the defense budget or blow up the (finances ?) --

MURRAY: (Inaudible) -- long-term problems and not impose any sacrifice. So Paul Ryan has done something very different.

GOOLSBEE: Paul Ryan did two things. So, one outlines a budget, as I say, that's very different from the fiscal commission, very different from the president, very different from what was to be the Gang of Six, and now five, and maybe none. (Laughter.) But is -- the 10-year budget is not a balanced plan, as I kind of outlined.

The second is, thinking through in the longer-run period what ought to be the approach on Medicare.

MURRAY: Right.

GOOLSBEE: It abolishes Medicare. The fundamental issue of Medicare when it was passed was that the elderly had the lowest insurance rates in the country. And I don't think that's a big surprise. They tend to be risky for an insurance company, and expensive. And to shift Medicare out of "We're going to put everybody in the same pot, so we have the lowest possible expenses and a -- and a very wide pool," I think there are some great dangers in that, not just for the budget, because you're fundamentally raising the cost of health care.

The -- what we must address in the long run is the health care cost inflation rate. The Ryan plan does something, switching it to a voucher and sending it out to private competition, which we know -- not -- when I say "we," we don't -- I don't mean the administration; everyone in the industry knows that will dramatically raise the overall cost of health care. The Congressional Budget Office says in the very first year it will be $6,000-plus higher costs overall, not just the -- what share are paid by the elderly.

MURRAY: Because of administrative costs?

GOOLSBEE: Yeah, because of administrative costs because -- I mean, if we look at Medicare --

MURRAY: But the idea is we create a marketplace where consumers become cost sensitive.

GOOLSBEE: Well, see, I think the evidence suggests, and the evidence before there was Medicare is that in high risk of disease and cost populations, that often means the breakdown of a market. So you're going to put in the market -- healthy elderly people who have never had a pre-existing condition are going to find that to be a wonderful experience. They're going to say, look, I can find a really cheap plan. But, you know, how many 75-year-olds have never had any health scare of any kind?

And I think to go back -- the majority of the elderly were not insured when they passed Medicare. That's why they passed it, even though the overall rates of uninsurance for the country were very similar to what they are today. I think it's quite dangerous to shift to a Balkanized market, because you're going to invite the kinds of cream-skimming that you see in the other parts of the market.

MURRAY: So let me change the subject a little bit. You talked about now is the time in the administration to focus on incentives for business.

GOOLSBEE: Yes.

MURRAY: And then we pick up the paper a couple of weeks ago and discover the NLRB is telling Boeing they can't move to South Carolina.

GOOLSBEE: Well, that's not the -- as you know, that's an independent regulatory agency. We're -- we don't have any --

MURRAY: Did they make a mistake?

GOOLSBEE: The administration is not supposed to weigh in on independent regulatory agencies. It's not my area --

MURRAY: I can't ask you about interest rates either?

GOOLSBEE: You can ask me anything you want, but I'm not -- I mean -- (laughs, laughter) -- but if you do say, "What should the Fed do?" I'm not going to tell you that, either --

MURRAY: But that's not -- but what's the -- I mean, we -- the statistics -- the statistics show that large companies based in the U.S. over the course of the last couple of years have reduced employment here by 2 million and increased employment overseas by at least 2 million. What do you have to do as an administration to reverse that?

GOOLSBEE: Look, I think that's a -- that's a very important -- that's a very important fact. I think we've got to do two things. One is highlight -- I would highlight the importance of new enterprises in the U.S., which has historically played very much to our strength. And everybody knows that new companies are more likely to die quickly, but even if you subtract off the jobs lost from the firm deaths, the net new -- the net job creation of new firms over the last 14 years that we have data is plus 40 million, which is well in excess of 100 percent of the job creation in the country.

So big multinational firms may have been shrinking employment. That has been historically well more than offset by the creation of new firms. So I think one thing is we've got to put the emphasis on new firms.

MURRAY: And don't worry about (employment complaints ?)? Or --

GOOLSBEE: No, no, I'm saying --

MURRAY: Okay.

GOOLSBEE: No. And then two, for existing enterprises, I think the fact that we have a tax system where we've got the highest corporate rate in the world but the actual collections are no higher than average because we have the narrowest base and the greatest variability of tax rates paid within an industry of any country in the world is a problem for us. I don't think it makes sense. I think we -- it would -- the --

MURRAY: It doesn't make --

GOOLSBEE: We ought to broaden the base and lower the rates.

MURRAY: It may not make sense, but what you've called for is a revenue-neutral tax reform. If you --

GOOLSBEE: Yes, broaden the base, lower the rates.

MURRAY: So broaden the base -- I mean, you talked about the importance of an investment tax credit just a minute ago. If you take away depreciation incentives in order to pay for a lower rate, do you help the problem? Does it -- I mean, it may make sense --

GOOLSBEE: Well, what's the problem? I mean --

MURRAY: The problem is employment. You've said it's growth and employment.

GOOLSBEE: Well, the investment incentives is about the short run. The longer run, having a competitive corporate tax rate -- as I say, the actual taxes paid are not very much higher here than other advanced countries and actually below quite a number. I think a simpler system that has a low rate -- I think there are a lot of companies that would be willing to give up even deductions or incentives that they use, that they like, if they could freely move money around --

MURRAY: Will it encourage growth?

GOOLSBEE: I think it would encourage growth. I mean, it would certainly in the -- in the scoring of corporate tax, they tend not to include that a lower rate would attract new investment in the United States. That tends not to go in the score. But I do think there would be a --

MURRAY: And when will the administration put a detailed corporate tax-reform program on the table?

GOOLSBEE: Look, as you know, there's some disagreement in Congress of do the -- would the Republicans want to do something on corporate tax reform alone this year or do they want to see if they win the White House in 2012 and tax reform be put off to 2013? I think we ought to address it. It's one of the issues of international competitiveness that could be done right now, in my view. Most issues of educating the workforce are multi-year. Innovation and R&D are for things that are going to be in a few years, but this strikes me as one we could do.

MURRAY: And just one other thing before I open it up. The Federal Reserve has now talked --

GOOLSBEE: (Chuckles) -- I told him, he was going to ask me about the Federal Reserve. I mean, you know I'm not going to answer --

(Cross talk.)

MURRAY: Well, no, this is fundamental to economic growth, to what you're talking about.

GOOLSBEE: Okay.

MURRAY: The Federal Reserve has talked about the need to begin its exit strategy sometime soon. The assumption is that that's going to result in higher interest rates. We still have unemployment over 9 percent. Can you get the kind of juice to growth that you're talking about in an -- in an environment where the Fed is unwinding all its stimulus of the last couple of years?

GOOLSBEE: I appreciate you didn't ask me what the monetary policy should be. I will say two things about that.

The first is, it strikes me the Fed is kind of engaged in the same effort the federal government is and that many of the governments around the world are, which is trying to get out of this advanced position that was done in rescue mode but not to get out so quickly that it stifles the private sector standing up.

If the private sector had not shown clear signs of strength, did not -- had not accumulated money on the balance sheet, if you were not seeing investment growing at double-digit rates and significant job creation, I would say we'd be more nervous than we are now. I think that what we want to be doing is phasing down this advance government involvement. That's the goal. And the Fed is doing its version of that.

On the technical point of, when the QE2 ends, is the interest rate going to go way up, I personally am a little puzzled by that, because this is the biggest non-secret that we've ever seen. They've almost literally said here's the date we're going to stop, here's exactly how much we're going to do. So if that were going to drive up interest rates, I would have thought that would have already started happening. And you kind of haven't seen that. But I could be wrong; I just don't understand that -- the mechanism.

MURRAY: And what will the unemployment rate be come November 2012? (Laughter.)

GOOLSBEE: Okay. We have an official forecast.

MURRAY: Yeah.

GOOLSBEE: The official forecast says ins the fourth quarter of 2012, the unemployment rate will be 8.2 percent.

MURRAY: And based on your -- as a student of history as well as economics, what does that tell you about the chances of the incumbent president?

GOOLSBEE: Well, that is neither a historical nor an economic fact. (Laughter.) We haven't -- I don't know that we've had --

MURRAY: Well, it wasn't a factual question.

GOOLSBEE: You know, we are ahead -- that forecast had to be locked in last November, comes out in the budget. And we had predicted for 2011 that there would be payroll job growth of about 145,000 a month for 2011 and that the unemployment rate would average 9.3 for 2011. Thus far in 2011, we're well head of both of those. The unemployment rate is lower and we've generated substantially more jobs than that. So it might -- you know, we might see improvement when we update it.

I think the evidence on what the political implications are are conflicting, because high unemployment rates equal bad, falling unemployment rates equal good, and somewhere between those two is a -- is November 2012. But I'm not an expert.

QUESTIONER: I'm Joe Bartlett. I'm a lawyer. I'm chairman of the Advisory Council to the Angel Capital Association. Sounds like a speech; it's not, and I'm not an expert. But are you aware that there is a principled position that patent reform will strangle entrepreneurship in its crib in this country? And if not, I'd be happy to mail it to you.

GOOLSBEE: Okay. I'm familiar with this argument, but just be careful about the phrase "patent reform." These patent reforms that we are talking about are different than the -- there's a whole existing battle between, sort of, big companies versus small companies about how -- how strong and how -- both how deep and how broad should patent protection be. And the fear there is, if you allow very broad, very powerful patents, that only big companies can afford to get and defend, that start-ups will essentially be driven out before they can ever begin. We're not weighing in to that -- to that battle.

What we're talking about is, let's find something that can speed up the patent application process, and actually it's been widely praised by the -- by most of the entrepreneurial community on the grounds that -- we got -- in a survey, I think it was done by the NVCA, 75 percent of the venture-backed start-ups said having a patent was critical for their being able to get financing.

So I think these patent reforms are not in that. But I am aware of those.

MURRAY: Steve. Right here.

QUESTIONER: Hi. Steve Ratner -- (inaudible). As everybody knows, last year the president appointed the Bowles-Simpson commission to do its budget work. It reported. It didn't get to the threshold to get a vote in front of Congress, but it did get significant bipartisan support, including from three Republican senators, I believe including from Tom Coburn.

The president's budget in January -- the president had said some nice things about it in his State of the Union; in the budget in January, not a lot about it. And then the president came out with his budget proposal, as you said, which you sort of said was four years -- 4 trillion (dollars) over 10 years, over 12 years. I think if you do the numbers right -- you can correct me -- it's about 2 1/2 trillion (dollars) over 10 years, 4 trillion (dollars) over 12 years. And Simpson-Bowles was 4 trillion (dollars) over 10 years.

My point is, Simpson-Bowles had pretty bipartisan support. I thought it was pretty thoughtful. I didn't agree with everything. I'm sure you didn't agree with everything. Since it was the president's commission, why couldn't the president just stand up and say, it isn't perfect, it isn't exactly what I would do, but it's an important step in the right direction; we should all just get behind this and do it?

GOOLSBEE: Well, I think you're being a little unfair to the president at the State of the Union. The president -- as you recall, in the run-up to that, the president's critics were clearly insinuating over and over that our long-run fiscal problems were rooted in discretionary spending and the stimulus and saying that the president's commitment to spending -- that wasteful government spending was what the long-run problem was.

And the president presented a budget, and in the State of the Union said, I'm going to give you a budget. You keep suggesting that it's about discretionary spending. I'm going to give you a budget that is going to bring discretionary spending as a share of the economy down to the level it was under President Eisenhower. And you are going to -- we are all going to have to agree that's only 12 percent of the budget and that doesn't do it. And what we would have to do is think about the broader issues of entitlements. And if you want to do that, we have to do that in a bipartisan way, and we've got to all hold hands and do that together as the fiscal commission said.

Now, I think any reasonable analyst would suggest that the first toe the president put in the water on entitlement reforms during the health care plan was not met by the greatest degree of seriousness of, ah, what an interesting idea of ways to save money in Medicare. I mean, it -- there is perhaps no other issue that was more influential in getting a bunch of new folks elected to Congress than the demonization of the -- of that issue.

So I think the president was perfect -- if the president had gotten up at the State of the Union and said, here -- I'm going to take the fiscal commission and here's my plan to cut Social Security and cut Medicare and do whatever, I really strongly do not believe that he would have been met by: That is an interesting first proposal. I think he would have been met by: First, he tried to pull the plug on your grandma and now he's trying to take her Social Security away. So --

MURRAY: Although the president wasn't --

GOOLSBEE: So --

MURRAY: -- terribly gracious in greeting the Ryan plan.

GOOLSBEE: No. But now, hold on. So that -- so that is on the release of the budget.

Then when the Ryan plan comes out, it's clear they've shifted and -- the part that I thought was healthy about the Ryan plan was stopping the claim that it was about discretionary spending and somehow out-of-control government from the stimulus was what our long-run fiscal plan was. And so the president releases his own plan that is balanced like the fiscal commission plan.

The part that's discouraging about the Ryan plan, as I say, is that it's not balanced at all. It's not even the difference between 100 percent spending cuts versus 66 to 75 percent spending cuts, depending on how you count the interest; it's that it's well more than 100 percent. And that is why the president is not positive on the reaction to the Ryan plan. As he says -- I think quite persuasively and quite correctly -- there are two totally different models of how do we cut enough from the deficit to stabilize the debt-to-GDP ratio and start it shrinking, which is something like 4 trillion (dollars) over 12 years -- that's sort of where our numbers come from -- and that the healthier way to do it is in a balanced way like the fiscal commission, not in an unbalanced way like the Ryan plan. So I think the president's plan is not exactly the same as the fiscal commission, but it's clearly motivated by that, and it's even taking the same ratios as Bowles-Simpson.

The problem of just putting forward Bowles-Simpson and trying to pass it is that the Republicans in the House -- there were Republicans in the Senate who were quite thoughtful, and they said: Look, we can have some revenues. Let's not raise rates. Let's just try to do it off deductions.

The Republicans and the Democrats from the House didn't go along with the deal, and we got to get both houses of Congress to approve the thing. So just the purely symbolic gesture of saying, well, here's a plan, but it can't pass, is not -- is not going to work. I mean, that's why we're in these negotiations.

They're at least somewhat promising. I mean, I think both sides are taking it pretty seriously, so we got to just hope it comes to (pass ?).

MURRAY: There's a question right here and then a question back there. And I'll get to you.

QUESTIONER: Nick Bratt with Lazard Asset Management. In your comments you talked about policy priorities, but you did not talk about the U.S. dollar. I wonder how important --

GOOLSBEE: (Chuckling.) That's the (third ?) forbidden subject --

QUESTIONER: -- I wonder how important the dollar is in your deliberations, or whether the policy of benign neglect continues to rule.

GOOLSBEE: Well, as -- (chuckles) -- as we all say, the U.S. Treasury speaks for the U.S. government on dollar policy. So I have no statement on what the dollar's --

MURRAY: But you pointed out that we've seen a pretty -- pretty extraordinary growth in manufacturing --

GOOLSBEE: Yeah.

MURRAY: -- that the recovery has been stronger in Michigan, Ohio --

GOOLSBEE: Yup.

MURRAY: -- Wisconsin. Surely that has something to do with the fact that the dollar is weaker.

GOOLSBEE: Well, look, I -- that's probably -- there is a tie. We have been critical that -- the president has repeatedly said he thinks the Chinese have not done enough on their currency to make it a more market-determined price. And I do think that that has had -- that has had the contribution to what have been major international imbalances. And the economies have a way to kind of getting back to equilibrium on -- either prices adjust, quantities adjust, a bunch of things adjust --

MURRAY: So has the weaker dollar been a contribution to economic growth?

(Scattered laughter.)

GOOLSBEE: That is complicated on so many levels, as you know. I think the dollar has had a contribution to the re-rise of manufacturing. I think the Chinese have moved some on the Chinese currency, but we have -- both Secretary Geithner and the president have said they thought they -- we believe they need to do more to make it a more market-determined price. And I think, you know, if you -- if some parts of the world are growing and other parts of the world are struggling to get out of deep recessions and, you know, just transitioning, prices adjust. I mean, that's not a -- that's not a policy statement. The Treasury speaks for the U.S. government on dollar policy, you know --

QUESTIONER: I'm David Robinson (sp). I'm old enough to remember when Britain could not meet its international obligations and Truman took over in 1947. I seldom hear serious discussion of major changes in defense policy as one of the things that might help our economic situation. I mean a fundamental look at our defense policy in this area or even any --

GOOLSBEE: Look, I think it's -- I think it's a valid point. In my view -- I'm not an expert on defense policy. In my view, the main driver of defense policy ought to be how do you best protect the nation.

The budgetary framework of that we obviously need to think about. In the fiscal commission and in the president's budget, the balanced plan approach says: Look, you got to look at entitlements, discretionary, defense, interest, revenues, all of those. I think you got to -- you want to do it in a way that does not compromise the security of the country.

But from what I -- when I talk to the defense experts, there is an argument that, strictly on security grounds, we ought to be thinking about transformation of the American military to meet some of the more 21st-century challenges, let's call it, rather than the Cold War challenges, and that that might have different budget implications for what the force structure is. And I will also say that to the extent that we are phasing out of massive, unpaid-for wars that began in the 2000s, a second benefit is that we don't have to spend that money.

MURRAY: Right here.

QUESTIONER: My name is Suyash Paliwal. I'm a lawyer at Allen & Overy here in New York. And I work on issues arising out of the Dodd-Frank Act and the implementing regulations. As the effective date approaches in July, I'm curious what your thoughts are on the impact of the Dodd-Frank Act on economic growth, short and medium term when that much is put on banks and capital providers.

GOOLSBEE: Well, I have a few thoughts on that. The first is deregulate -- if in your mind is the model -- the only good regulation is a dead regulation and anything that puts regulatory structure on the financial industry is bad, I kind of think the last three years did not serve your worldview very well because ripping up the rules of the road wasn't even good for the financial institutions, okay? If people can't trust the balance sheets, if they don't know where losses are, there's no transparency, there are people who are coming in and doing things, taking big payments for themselves and then retiring the undefeated heavyweight champion and then two years later the thing blows up with no consequence, that's not good for the private -- that's not good for markets. That deeply undermines capital markets. With no public trust, capital markets cannot function.

So step one is, Dodd-Frank put down a very serious marker that we've got to reestablish public trust in capital markets. To not do so is deeply undermining of the entire market system.

I think overall Dodd-Frank has some very important positive contributions. And yes, I know there's quibbling within the regulatory agencies over this rule or that rule or what should some number be. But overall, the prospects of getting hundreds of trillions of dollars out of dark pools of derivatives, where the counterparty issues and a lack of transparency nearly blew up the entire financial system, is good. I can see how some people aren't going to want to pay more margin or whatever, but the -- I mean, we just went through -- that almost destroyed the world, and I think it's good that we're doing that.

Consumer protection -- how can you not look at what happened in the mortgage market and the sophistication of the products that went to less and less financially sophisticated people and the way that exploded and not think that there would be some positive component to a consumer protection bureau? I mean, yes, we've got to work on the details of how we do it, but it strikes me that most -- on the most of the big pieces of Dodd-Frank, it's quite important. And yes, we should think about the competitiveness of our financial markets. We want to do this in the international context. But I really don't understand the argument that in some sense we shouldn't have -- you know, the argument that some have made in Congress, we should go repeal Dodd-Frank and go back to the -- literally to the conditions that existed before the financial crisis. I think that's way disconnected from reality.

MURRAY: So -- can I do two --

GOOLSBEE: One more.

MURRAY: -- last question, because I promised this gentleman up front and I promised this fellow in the back -- two quick questions. And if I can't --

GOOLSBEE: Ah, seems like you're making some promises you can't fulfill, huh? (Laughter.)

MURRAY: Well, we'll see. We'll see. Go ahead. Yes.

QUESTIONER: Yes. (Name inaudible) -- U.S. editor with -- (inaudible). Mr. Strauss-Kahn has resigned. Where does the White House lean for a new nomination? Asian or European?

MURRAY: This is the European section of the --

GOOLSBEE: (Chuckles.) I'm definitely not getting -- weighing in to that. Look, that's not -- I'm chairman of the CEA. I --

MURRAY: But is it a -- is it -- is it a good idea to have -- you know, to have this rule that the head of the IMF comes from Europe and the head of the World Bank comes from the U.S.?

GOOLSBEE: Look, you are so far out of my lane. (Laughter.)

QUESTIONER: Okay. I will -- I will --

GOOLSBEE: I think at this point -- (inaudible) -- director named. It's a very serious time, obviously, both in Europe and in many economies. So I think we want to get a director quickly. But that's not my -- this is clearly not my call.

QUESTIONER: Can I just add then a more appropriate question maybe -- on the Greek debt, what is your position? People have been saying, in Europe, now the time has come to restructure it. What do you think on that?

MURRAY: And you have to answer that in 15 seconds. (Laughs.)

GOOLSBEE: To be determined. You know, I --

MURRAY: (Laughs.)

QUESTIONER: Hi. Steven Diamond (sp) -- (off mic). I have a question I think that you should be able to answer. It goes to your initial point about the biggest issue: growth.

GOOLSBEE: Yeah.

QUESTIONER: You talked about the administration wants to invest in future growth. And you've mentioned innovation, research and development, education. And these all sound great.

But what does the administration believe are the country's competitive advantages relative to other countries? And specifically, how would --

MURRAY: One question.

QUESTIONER: -- it encourage growth of those areas?

GOOLSBEE: Well, you know, I, like most economists, am not a huge fan of industrial policy of the form of, you know, I -- we ought to pick the following six industries to be the industries of the future and decide this should be the technology. But I would say if you look over the recent past, we've clearly got comparative advantage in tech -- we have the strongest research university system in the world by far; research-based, science-based activities which lead over into manufacturing, into biotech, into a bunch of things; that's been a very strong thing in our favor. The health system has been strong in our favor.

Until three years ago, financial services was a -- was a major growth area in the U.S, I think to -- partly related to it being advanced, but even beyond that, as these imbalances are closing manufacturing and an increased orientation to exports. And small-business entrepreneurs and the culture of the U.S. has always been perhaps our strongest comparative advantage -- hard to quantify in numbers but really, really important.

I think, in contributing to these, over the long run, investing in the education system, not skimping on our science budget and encouraging research and development and encouraging the kind of investments in physical capital, as well as in infrastructure, that facilitate building of factories at homes -- at home, are -- I mean, the Solow growth model is basically physical capital, human capital and productivity/innovation. Those are the drivers of growth. They always have been in all economies. The U.S. is the outlier in highest productivity and (riches/richest ?), so we want to be highest in those three. So I kind of think, to me, the industrial policy to ensure industries of the future involve doing the science, educating the workforce and pressing ahead. I'm sure clean energy would be in that too.

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